There was much discussion in the first quarter about when the Federal Reserve (the Fed) might start cutting its Federal Funds interest rate. The meandering decline of inflation to reach the Fed’s target of 2% remains the most obvious barrier. It is worth noting that the Fed’s 2% target is based on an inflation measure called the Personal Consumption Expenditure Price Index (PCE). The Fed prefers the PCE because it is less influenced by housing prices than the better-known Consumer Price Index (CPI). The CPI rate was 3.1% in January, but the PCE rate was 2.4%, which gave many market watchers hope of a March interest rate cut. Unfortunately, both the PCE and the CPI rates ticked up 0.1% in February to 2.5% and 3.2% respectively. It was no surprise then that the Fed’s interest rate committee left rates unchanged when it met in March.
After the Fed’s March meeting, Federal Reserve Chairman Jerome Powell noted that employment and the economy were in good shape. The U.S. Bureau of Economic Analysis (BEA) reported that the U.S. economy grew a solid 3.2% in the fourth quarter of 2023. While the unemployment rate rose to 3.9% in February, its highest level in two years, it remains at very low levels.
Despite 30-year mortgage rates hovering around 7%, there were signs that the housing market was turning a corner in February. The supply of homes for sale was up 10.3% from a year ago according to the National Association of Realtors. February’s existing home sales level was also the highest in a year. The median home sale price in February was up 5.7% from a year ago to approximately $384,500.
With no interest rate cut in sight, long-term bond prices dropped during the quarter thereby making their yields more competitive. The 30-year U.S. Treasury yield rose approximately 0.5% to 4.5% and as a result, the Morningstar US 10+ Year Core Bond index was down 2.33% for the quarter. With short-term yields hovering around 5%, short-term bonds continue to be in high demand. This led the Morningstar US 1-3 Year Core Bond Index to be up 0.46% for the quarter. Overall, the U.S. bond market was down 0.78% for the quarter per the Morningstar Core Bond Index.
The U.S. stock market shrugged off the interest rate situation and focused on the fervor over artificial intelligence (AI). The potential of AI has spread beyond tech companies to impact industrial, media and financial company stocks. Overall, the U.S. stock market was up 10.24% for the first quarter per the Morningstar US Market Index.
Global markets were up 4.29% according to the Morningstar Global Markets ex-US Index. The sluggish Chinese economy continued to weigh on emerging market stocks, but they managed to be up 2.07% per the Morningstar Emerging Markets Index. The Morningstar China Index is now down over 40% since the beginning of 2021.
Signs that economic activity could be rebounding in China helped push oil over $80 per barrel for the first time since last October. The Morningstar US Energy Index gained 13.25% in the quarter as a result. Gold finished the quarter up over 8% at a new high of approximately $2,250 an ounce. Foreign central banks looking to diversify and Chinese investors shifting out of stocks and into gold were cited as big buyers
The Federal Funds rate is an interest rate the Federal Reserve charges banks to borrow from it for very short periods of time. The Personal Consumption Expenditure Price Index reflects the changes in prices of goods and services purchased by US consumers. The Consumer Price Index measures the change in the cost of living by tracking the prices of a basket of consumer goods and services.
The Morningstar US 10+ Year Core Bond Index measures the performance of fixed-rate, investment-grade, US-dollar denominated bonds with maturities of 10 years or greater. The Morningstar US 1-3 Year Core Bond Index measures the performance of fixed-rate, investment-grade US dollar denominated securities with maturities between 1 and 3 years. The Morningstar U.S. Core Bond Index represents the performance of a portfolio consisting of U.S. Treasury, mortgage-backed, and corporate bonds with a term greater than I year to maturity.
The Morningstar U.S. Market Index measures performance of company stocks comprising 97% of the tradeable universe of U.S. stocks. The Morningstar Global Markets – ex U.S. comprises developed and emerging market large cap stocks outside the U.S. The Morningstar Emerging Markets Index measures the performance of large and small-cap stocks in 24 emerging economies. The Morningstar China Index measures the performance of the largest 97% of investible Chinese stocks. The Morningstar US Energy Index measures the performance of US companies that refine or produce oil and gas, pipeline operators and oil field service companies.
The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.
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